The Micro Economics and Macro Economics

Economic analysis is of two types (a) Micro economic analysis and (b) Macro economic analysis

a) Definition of Micro economics:

According to E. Boulding, “Micro economics is the study of particular firm, particular household, individual price, wage, income, industry, and particular commodity.”

In the words of Leftwitch, “Micro economics is concerned with the economic activities of such economic units as consumers, resource owners and business firms.”

  • ‘Micro’ is a Greek word means ‘small’.
  • Micro economic theory studies the behaviour of individual decision-making units such as consumers’ resource owners, business firms, individual households, wages of workers, etc.
  • It studies the flow of economic resources or factors of production from the resource owners to business firms and the flow of goods and services from the business firms to households. It studies the composition of such flows and how the prices of goods and services in the flow are determined.
  • In this analysis economists pick up a small unit and observe the details of its operation.
  • It provides analytical tools for the study of the behaviour of market mechanism.
  • It is also called as Price theory and
  • It is also called as Partial Equilibrium analysis.

Conclusion: Micro economics has been defined as that branch where the unit of study is an individual, firm or household. It studies how individual make their choices about what to produce, how to produce, and for whom to produce, and what price to charge. It is also known as the price theory is the main source of concepts and analytical tools for managerial decision making. Various micro economic concepts such as demand, supply, elasticity of demand and supply, marginal cost, various market forms, etc. are of great significance to managerial economics.

Importance of Micro economics:

  • Micro economics occupies a very important place in the study of economic theory.
  • It has both theoretical and practical importance.
  • It explains the functioning of a free enterprise economy.
  • It tells how millions of consumers and producers in an economy take decisions about the allocation of productive resources among millions of goods and services.
  • It explains how through market mechanism goods and services produced in the community are distributed.
  • It explains the determination of the relative prices of the various products and productive services.
  • It helps in the formulation of economic policies calculated to promote efficiency in production and the welfare of the masses.

Limitations of Micro economics:

  • It cannot give an idea of the functioning of the economy as a whole. An individual industry may be flourishing, where as the economy as a whole may be languishing.
  • It assumes full employment which is a rare phenomenon, at any rate in the capitalist world. Therefore it is an unrealistic assumption.

b) Definition of Macro economics:

According to E. Boulding “Macro economics deals not with individual quantities as such but with aggregates of these quantities, not with individual income but with national income not with individual prices but with price levels, not with individual outputs but with national output.”

According to Gardner Ackely, “Macro economics concerns with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of national income and with the general price level.”

  • Macro economics is the obverse of microeconomics.
  • It is the study of economic system as a whole.
  • It studies not one economic unit like a firm or an industry but the whole economic system.
  • Therefore it deals with totals or aggregates national income output and employment, total consumption, saving and investment and the genera level of prices.
  • It is also called as Income theory and
  • It is also called as aggregative economics.

Conclusion: Macro economics studies the economics as a whole. It is aggregative in character and takes the entire economic as a unit of study. Macro economics helps in the area of forecasting. It includes National Income, aggregate consumption, investments, employment etc.

Importance of Macro economics:

  • It helps in understanding the functioning of a complicated economic system
  • It gives a bird’s eye view of the economic world
  • For the formulation of useful economic policies for the nation macro economics is of the utmost significance.
  • It is far more fruitful to regulate aggregate employment and national income and to work out a national wage policy
  • It occupies most important place in economic theory in its pursuit of the solution of urgent economic problems.

Limitations of Macro economics:

  • Individual is ignored altogether. It is individual welfare which is the main aim of economics.
  • It overlooks individual differences. Say the general price level may be stable, but the price of food grains may have gone spelling ruin to the poor.

Difference between Micro economics and Macro economics:

The main differences between micro economics and macro economics are the following: Micro economicsMacro economics
1.Difference in the degree of aggregation:It studies the individual units of the economy like a firm, a particular commodity.It deals with aggregates like national income and aggregate savings. It studies the problem of the economy as a whole
2.Difference in objectivesIt is to study of principles, problems and policies concerning the optimum allocation of resourcesIt studies the problems, policies and principles relating full employment of resources and growth of resources.
3.Difference of subject matterIt deals with the determination of price, consumer’s equilibrium, distribution and welfare, etc.It is full employment, national income, general price-level, trade cycles, economic growth, etc.
4.Method of studyMicro economics laws establish relationship between the causes and effects of economics phenomena and it is formulated by taking some assumptions.Macro economics elements are categorized into aggregate units like aggregate demand, aggregate supply, total consumption, total investment, etc.
5.Different assumptionsIt analysis how production and factors of production are allocated among different uses.It analysis how full employment can be achieved.
6.Difference of the forces of equilibriumIt studies the equilibrium between the forces of individual demand and supply or market demand and supply.It deals with equilibrium between the forces demand and supply of whole economy.